Expanded opportunity?

A bigger Panama Canal could shake up competition for the Port of Virginia.

In less than three years, ships the width of a football field will be able to travel through an expanded Panama Canal. East Coast ports in the U.S. are hoping these massive vessels — which can carry up to 6,500 truckloads worth of today’s standard containers — will steer a wave of cargo toward them.
In response, ports on the Eastern Seaboard are spending millions to deepen their channels, modernize marine terminals and raise bridges to handle these enormous carriers.

Fortunately, the Port of Virginia is already ahead. It has naturally deep and unobstructed harbors, and port leaders had the foresight to invest in modernized cranes that can handle vessels even larger than those that will fit through the expanded canal. “The Port of Virginia is very well-positioned to accept a lot of this cargo,” says Sara Russell, a professor at Old Dominion University’s Maritime Institute. “The deep water is established; the infrastructure system is nearby. We’re not essentially playing catch-up the way a lot of other terminals are.”

Yet, despite all the hustling, port consultants aren’t certain the Panama Canal expansion will be a new chapter in international trade that will create a wholesale shift in trade patterns. “What’s going to affect trade routes is where the production centers are and where the demand is,” says John Martin, a Lancaster, Pa.-based consultant for seaports nationwide. “Just because we have a bigger canal doesn’t mean all this cargo is going to flow through the canal … The dynamics of this are extremely hard to predict.”

Experts expect any bump in cargo traffic from the canal to be gradual, and even then Hampton Roads will face stiff competition from Eastern ports rushing to match its channel depths and modern terminals. West Coast ports and railroads will fight to retain market share as well.

And before it can focus too much more on future prospects, the port must fight to regain market share it lost since the recession. It has bounced back from the recession more slowly than other East Coast ports serving larger populations.

Unhappy with the port’s recent performance, Gov. Bob McDonnell in July replaced all but one member of the Virginia Port Authority’s board of commissioners. “The competition has really, really sharpened their pencils and are offering more efficient and effective services, so we have to look at them, learn from them and change our practices to not only match them but to beat them,” says Sean Connaughton, Virginia’s transportation secretary and the former U.S. maritime administrator under President George W. Bush.

State officials want the Virginia port to recapture its share of current East Coast traffic and be ready to snare whatever new business the expanded Panama Canal might bring.

“Because of the Panama Canal, we are seeing dramatic capital investment by Gulf Coast and East Coast ports,” says Connaughton. “So if anything, our competition is going to get tougher, and we have got to be able to respond to that quickly.”

The expansion
Completed in 1914, the Panama Canal was an engineering marvel that transformed international trade by creating a shortcut between the Atlantic and Pacific oceans. But the canal was built when steamships ruled the seas. Today about 40 percent of the world’s container capacity exists on post-Panamax ships, which are too large to travel through the canal.

Expansion plans for the canal began decades ago, but it wasn’t until after the U.S. transferred the canal to Panama in 1999 that plans took shape. In an October
2006 referendum, Panamanians voted overwhelmingly in favor of the $5.25 billion expansion. Not only was the canal too narrow for larger ships, but congestion was slowing travel through the canal.

Scheduled for completion around the canal’s 100-year anniversary in 2014, the project includes construction of a third set of locks and the dredging and widening of entrances to the canal and some of its navigational channels. Studies on the effect of the expansion vary widely, but the U.S. Maritime Administration is predicting a major change. “This project has the potential to be the biggest game-changer in transportation since the intermodal container or the hybrid car,” U.S. Maritime Administrator David T. Matsuda said during a speech earlier this year. The body he heads, the U.S. Maritime Administration, has commissioned a four-phase study on the effects of the expansion, but results have not been released.

The project will double the canal’s overall capacity and triple the cargo-carrying abilities of ships traveling through it. While the canal currently can handle ships capable of carrying about 4,500 TEUs (20-foot equivalent units), the expansion will accommodate ships with a 13,000-TEU capacity. These ships are not only as wide as a football field, they’re more than three football fields long and produce a draft of 50 feet.

That 50-foot depth is critical for post-Panamax ships, and East Coast ports are racing to dredge sand and rocks from their harbor bottoms to accommodate them. For example, the Georgia Ports Authority is seeking federal money for a $625 million plan to dredge the 30-mile-long channel to its terminal. The Port of Miami, expecting to benefit from being the closest U.S. East Coast port to the canal, is dredging its channel to 50 feet and building a $1 billion tunnel to connect the port to interstate highways. The Port of Baltimore has leased one of its terminals to Ports America Chesapeake to build a 50-foot ship berth.

The largest port on the East Coast — the Port of New York/New Jersey — is undergoing a $2.3 billion project to dredge its rocky harbor to 50 feet. Plus, it plans to spend $1.3 billion to raise the Bayonne Bridge which is too low for today’s large ships.

Meanwhile, the Port of Virginia is already prepared. “We’re ready for [the larger ships],” says Russell Held, the port’s deputy executive director development, “We’re already getting bigger vessels through the Suez Canal. We will continue to see these…We have the deep water, modern terminals and rail reach. So as these bigger vessels come through the Panama Canal, we have that infrastructure in place.”

A flood of new cargo?
Virginia port officials are optimistic about opportunities from the expansion — but they aren’t expecting a flood of new cargo.

“What we expect to see is a steady increase in cargo moving through the East Coast because of the bigger Panama Canal,” says Connaughton. He believes increased cargo will come not only from the larger vessels calling at the port, but also an increase in traffic from the Suez Canal, which will compete with the expanded Panama Canal.

In fact, the port already handles post-Panamax ships that travel from Asia through the Suez Canal to reach the East Coast. In mid-July, the MSC Bruxelles set a record as the largest ship ever to be serviced by the Port of Virginia. The vessel, 1,105 feet long and capable of carrying 9,200 TEUs, was unloaded at APM Terminals in Portsmouth, which is now operated by the Port of Virginia.

Officials predict a somewhat muted effect from the Panama Canal expansion because East Coast traffic already has increased. During the past decade, East Coast ports have chipped away at some of the West Coast’s market share.

Traditionally, shippers had sailed from Asia to the West Coast and relied on trains to send products to the Midwest and East Coast. But as Western railroads increased their freight rates and West Coast ports faced a number of issues — including congestion and labor disagreements — shippers started using “all-water routes” to bring their goods to the East Coast. Big-box retailers also began to open distribution centers in the East, making the East Coast ports more attractive. “We already have taken a significant portion of West Coast traffic,” says Held.

It was that trend — rather than any talk of the Panama Canal expansion — that prompted officials at the Port of Virginia to conduct expansion projects, such as the modernized cranes at Norfolk International terminals and a reconfiguration of the container yard and on-dock rail access.

The bottom line
Ultimately, ocean carriers will decide their shipping routes primarily on the basis of one thing — cost. That’s what is most important to foreign companies doing business in the U.S. “It’s all about [companies] getting their goods from point A to point B,” says Jim Meath, a Williams Mullen lawyer in Richmond who works with Asian companies doing business in the U.S. “They’re very, very attuned to the transportation piece and the cost of that. It’s a big part of what they do.”

All-water routes from Asia can sometimes be cheaper, especially with the economies of scale offered by post-Panamax ships. “These are more efficient to operate and cleaner,” says Held. “They provide lower transportation rates, better value for both the ocean carrier and the shippers, and for the consumers.”
Still, a number of factors could reduce the benefits of an expanded Panama Canal for East Coast ports. First, the ports can’t control who reaps savings from the large ships. If ocean carriers kept all the savings to themselves, the expanded canal may not mean an increase in cargo. “The possibility of bringing larger ships, all that does is save money, but that doesn’t necessarily translate into more cargo,” says Rodolfo Sabonge, vice president of marketing, research and analysis for the Panama Canal Authority. “The carrier can transfer some savings to the shipper or he can keep them. That’s not something we have control over.”

The cost savings of a route through the canal may be reduced by other factors. While sometimes cheaper, the all-water route through the Panama Canal takes up to seven days longer than using rail from the West Coast to reach the U.S. heartland. The all-water route may provide some savings for less expensive products but may not be appropriate for high-value cargo.

The ports’ preparedness also will have an effect. The more ports that are ready to handle larger ships, the more likely carriers will be to use the canal. But don’t expect West Coast ports to simply sit back and let the East Coast steal market share. The ports of Long Beach and Los Angeles are spending millions to modernize and upgrade their terminals. Railroads on the West Coast also will strive to offer competitive rates.

In addition, many ships won’t be loaded with the full 13,000 TEUs, says Asaf Ashar, a research professor at the National Ports & Waterways Initiative at New Orleans University. “So even if you save something, it is not some kind of dramatic savings,” he says. In addition, the canal will be expected to pay for the major expansion. “The Panama Canal will squeeze out some of the savings through [increased] tariffs,” says Ashar. (Sabonge, however, says the canal will ensure its rates are competitive.)

Another option under consideration by large shipping lines is the creation of offshore hub ports in the Caribbean, where larger vessels would transfer cargo to smaller ships that could serve ports along the East Coast. “There will be some adjustment [from the Panama Canal], but probably a bump,” Ashar says of the Panama Canal’s expansion.

Fight for the heartland
So what does all this mean for Virginia? The fight for increased cargo will head straight to the heartland of the U.S. — especially the Ohio Valley region. “Virginia is well positioned because of the Norfolk Southern corridor,” says Martin, “but they compete in a market that’s much more discretionary. They’re going to have to compete heavily intermodally [using both trucks and trains to move the cargo] because that’s where their business is going to be.”

The Port of Virginia competes for Midwest markets not only with neighboring ports, but also with the West Coast. Virginia’s rail component has been greatly strengthened by last year’s opening of Norfolk Southern’s Heartland Corridor. The project created a 250-mile shortcut between Norfolk and Chicago for double-stacked container trains, eliminating a day of transit time. In addition, CSX — another major railroad connected to the Port of Virginia’s marine terminals — is making room along the Interstate 95 and I-70/I-76 corridors for double-stacked container trains as part of its National Gateway project.

While Virginia’s improved rail arteries should help it compete for Midwest traffic, a main disadvantage is that the port does not serve a large local population. That’s one reason that the Port of Virginia has been slow to regain steam after the recession.

While the Port of Savannah (serving the Atlanta area) and the Port of New York/New Jersey have bounced back to pre-recession cargo volumes of 2.8 million TEUs and 4.1 million TEUs respectively, the Port of Virginia last year increased cargo traffic by a mere 1 percent to 1.9 million TEUs. In 2008, the Port of Virginia handled 2.1 million TEUs. (Container traffic was up 2 percent for the first seven months of 2011.)

The lackluster performance has been related to a number of factors, including the port’s distance from a major population center and some shifts in grain trade from containers to bulk. In addition, China is currently not importing any Virginia logs because of fumigation issues.

Disappointed by the weak growth, McDonnell’s administration recently replaced 10 of the 11 members of the Virginia Port Authority’s Board of Commissioners, adding new appointees with more business backgrounds, officials say. “It’s a change in mentality from ‘build it and they will come,’ to one that recognizes that shippers and carriers have choices,” says Connaughton. The change did not affect anyone in the port administration, and the board has thrown its support behind Executive Director Jerry Bridges.

Mike Quillen, the lone commissioner McDonnell kept on the board, was recently elected chairman. He says the commissioners will focus on evaluating pricing models and efficiencies offered by other East Coast ports. “Other states have taken a different approach strategically to how they want to price their products and services with subsidies and tax incentives,” says Quillen, who is chairman of Abingdon-based Alpha Natural Resources, the third largest metallurgical coal producer in the world. “We need to see how in Hampton Roads we react to that.”

Another opportunity for Virginia, now and in the future, is increasing bulk and breakbulk cargo. This cargo, such as grain and coal, travels unpackaged. “The focus has really become on bulk and export bulk because of the demand for coal in China. We see bulk as a primary opportunity,” says Martin, who adds that the expanded Panama Canal may serve exports from Norfolk and Baltimore headed to China.

Looking at noncontainer trade is one of the key opportunities the McDonnell administration wants the commissioners to explore, says Connaughton. “We have some incredible opportunities looking at vehicles and bulk commodities,” says Connaughton.

While the canal’s expansion may not have the same impact as its opening did nearly 100 years ago, Virginia is preparing to capture whatever additional container volume comes its way. “I think the consensus is that China and India are going to be the economic drivers in the global trade,” says Quillen. “Having better access to that region through the Panama Canal, you have to look at that as a positive.”